Kosovo Spurned Legal Advice on “Dangerous” Highway Deal

Authorities ignored legal advice warning it strongly against signing a contract with Bechtel-Enka to construct the country’s first highway, according to a leaked document Pristina Insight has obtained.

The deal to build Kosovo’s first highway, worth at least 700 million euro, is heavily weighted in favour of the contractor, Bechtel Enka, and broke the terms of the tender, according to the government’s own legal advisors.

A document drafted by Eversheds, a respected British law firm brought in by the government to help with negotiations, which Balkan Insight has obtained, warned that signing the contract would be “extremely dangerous”.

The law firm pointed out numerous areas where the standard contract for major infrastructure projects, the Federation of Consulting Engineers’ Red Book, had been amended “in a completely onesided way”.

The company provided the advice at the end of January 2010.

Although the final contract was not signed until April 2010, sources close to the negotiation process admitted that many of Eversheds’ suggested changes to the contract were not made.

This is confirmed by Balkan Insight’s own analysis of differences between the highlighted problematic clauses and the final contract, released for the first time this week by the opposition Vetevendosje party.

Eversheds was paid 1.7 million euro to provide advice to the government.

Tender subject:

A tender to build Kosovo’s first highway, linking Morine on the Albanian border with Merdare on the Serbian border, was launched in September 2009.

The road was devised to link up with Albania’s first highway, also built by Bechtel-Enka and finished in 2009, to form a so-called “patriotic highway” running all the way from Pristina to Tirana.

From the start, Bechtel-Enka was seen as the runaway favourite to land the job in Kosovo, so there was little surprise when the government in January 2010 announced that the US-Turkish consortium had won.

The only other bidder, Strabag of Austria, had offered a set price of 1.3 billion for the full highway.

But according to a document obtained by this newspaper, Eversheds warned the government that Bechtel’s offer broke the terms of the tender and suggested that the procurement process might have to be rerun. This advice appears to have been ignored.

Eversheds told Kosovo’s government that Bechtel-Enka’s proposal did not meet the tender guidelines

While the Kosovo government had stipulated that bidders had to provide a fixed price for the work, Bechtel-Enka proposed a “remeasureable” offer – containing per unit prices for the materials but no total cost.

The original offer of 400 million euro, Eversheds cautioned, was “nothing more than a non-binding estimate”.

Eversheds wrote that the decision to accept a remeasureable contract had “procurement law implications” and said “it may be necessary to inform other tenderers/potential tenderers.

“They may also want and be entitled to tender on a remeasurement basis,” the law firm wrote.

Andrea Capussela, until recently one of the highest ranked diplomats working in Kosovo, a specialist in economics, said he also found the shifting standards for the tender disturbing. He agreed that the deal was “seriously flawed” and to the “detriment of Kosovo’s government.

“The construction contract was negotiated after the winning bidder had been chosen, when the negotiating power of the government was lowest,” he told the Pristina daily Koha Ditore last month.

“A competitive bidding process would have required fully comparable offers based on the same contractual terms, so that the selection can be made only on price, execution speed and some technical specifications.

“How high the price will rise remains to be seen, and should be closely monitored,” he added.

A spokeswoman for Bechtel-Enka defended their bid, saying it was a “compliant proposal that met the requirements of the government’s tender dossier.

“Based on our innovative technical solutions and competitive offer, the GoK selected BEGP [Bechtel Enka General Partnership] as the winning bidder in December 2009,” she told Balkan Insight.

“BEGP was proud to be the successful bidder from this open and transparent international tender, which we won as a result of providing the lowest price and best technical solution,” she continued.

“We are now working with the government to deliver the motorway in accordance with our agreement and complete the first sections well ahead of the original programme.”

The contract with Bechtel-Enka including a number of costs to the government beyond what it usually expected in such deals

Minister of Economy Bedri Hamza told Balkan Insight that Bechtel-Enka had fulfilled all the tender criteria.

“If there was something wrong all other bidding companies had a chance to meet the respective bodies to make a claim,” he said.

“Everything was within procurement rules.” He added that it is normal that changes to a project result in revised costs.

“Even in contracts worth less the laws allows for deviations within foreseen limits.”

Hamza also said that Kosovo’s government had taken a fair share of the risk, adding that “so far we haven’t paid any penalty”.

Final cost unknown:

The Albanian government brought in Bechtel-Enka in 2006 to build a key section of its highway from the port of Durres to Kosovo at a cost of 418 million euro.

As with the subsequent Kosovo contract, the deal was remeasureable and the final cost for the work came in at more than 1 billion euro.

Concerns were raised when Kosovo entered into a similar deal in 2010, but the government batted away criticism.

Eversheds’ document reveals, however, that it was extremely worried that costs would balloon as a result of the deal negotiated.

It warned that the overall cost of the highway could be more than double the 400 million euro fee on the basis of which Bechtel Enka was selected.

Eversheds warned that this variable type of contract offered no certainty about price and that the risk and responsibilities being shifted to the government from Bechtel-Enka would result in much higher costs.

While some of these “onerous” conditions were later removed from the final contract, the contract obtained by this newspaper shows many worrying elements remained in place.For example, the government agreed to pay to set up quarries and depots for Bechtel-Enka and also pay for customs duties of imported equipment, representing costs of 25 million euro and 10 million euro respectively – despite Eversheds’ suggestion that these areas should be looked at.

Eversheds warned the government it was being asked to take on too much risk compared to the contractor

The cost of the final deal signed with Bechtel Enka also climbed from 400 million to 660 million euro after four months of negotiations.

The Ministry of Economy of Finance and the IMF have subsequently placed the cost at 1 billion euro, a figure the Ministry of Transport disputes.

Claims that expenditures have also been capped also appear questionable.

While the Kosovo government has the right to refuse the construction of any section if the design costs provided by Bechtel are 20 per cent higher than those stipulated in the contract, costs for each section can increase after construction is agreed due to a range of reasons.

These vary from unexpected problems with the terrain to design failures. These extra costs, accord- ing to the contract, will be borne almost entirely by the government.

Eversheds points out that under the contract, the government takes full responsibility for the design of the route, adding a potential estimated extra cost of 50 to 100 million euro if problems arise because of defects in this area.

The government is also required to pay for all design changes arising from “unexpected ground conditions”, unlike the cost sharing mechanism that is usually included in such contracts.

“The BEJV amendments are additional risks for the MTC [Ministry of Transport and Communications],” Eversheds wrote. “In large part they should be resisted since we cannot advise that they are a reasonable commercial position.”

Shpend Ahmeti, economics professor at the American University in Kosovo and member of the opposition Vetevendosje party, released the Bechtel-Enka contract for the first time this week.

Until then, Hashim Thaci’s government had refused to make it public, citing commercial confidentiality.

Ahmeti told Balkan Insight that Bechtel-Enka had outmanoeuvred the government.

“On one side we have a government with weak institutions and on the other side we have a multinational and experienced company that buys the best lawyers that can be affordable,” he said.

“The result is that the contract completely favours the company and is not favourable to the government,” he added.

He said Bechtel was not to blame for trying to maximise its profits; the government was to blame for not protecting the public interest.

“The most important thing is that this contract does not have a fixed price,” he added. “We don’t know how much this project will cost.

“The government says it will cost 700 million euro, the contract is signed for 659 million euro, but there is space in the contract that allows Bechtel-Enka to exceed this amount,” he explained. “In the end, we don’t know how much this project will cost.”

Get-out clause?

Perhaps Eversheds greatest concern in its memo to the government was that Kosovo was signing up to a contract for the full highway – not to sections, as was originally planned, despite the fact the funds were not in place to pay for it.

The then transport minister, Fatmir Limaj, claimed following the signing of the final deal that the government could pull out after the first two sections were finished.

But examination of the contract reveals that the government can only put on hold – not cancel – the construction of other sections, and can only do that if it can prove that funds are not available.

Bechtel-Enka requires a letter from the Ministry of Finance confirming the financial situation before the start of each section.

Economic experts told Balkan Insight that as Kosovo’s government budget is 1.4 billion euro a year, it will not be able to avoid constructing the whole highway, even if it means severely cutting other expenditures.